I am retired and now live in the EU. I have a pension (£35,000 per annum), which I accumulated whilst working abroad (in the USA). I used to live and work in the UK and still own the house I used to live in. This is now rented out, and this income is received in the UK. After house maintenance and repair costs and UK taxes, some rental income is left over, which I would like to gift to my children each month. Would this gifting be considered a gift from surplus income for inheritance tax (IHT) purposes by HMRC? Is there any paperwork that should be put in place to ensure that this is treated as such in case HMRC questions this when dealing with my estate? 

Arthur Weller replies: 

The gifts may qualify for IHT exemption as ‘normal expenditure out of income’ as long as the monthly gifts are: (a) part of a regular pattern of giving; (b) paid from your after-tax income (including net UK rental profits) rather than capital; and (c) you still have enough income to maintain your usual standard of living (looked at ‘one year with another’). If those three conditions are met, HMRC will generally accept them as normal expenditure out of income, such that they are immediately outside your estate for IHT purposes. With regard to supporting paperwork; it would help if you had: (1) a letter of intent (dated) stating you intend to give £X per month to [your children] as part of your normal expenditure out of income; (2) an annual schedule showing: total income by source (including pension and rental profit after expenses and tax), regular living costs, surplus, and gifts paid; (3) an evidence file, containing bank statements, rental accounts or letting statements, UK tax computations, pension, P60s, etc.; and (4) preferably a standing order from an account receiving your income (this helps to demonstrate regularity and that gifts are from income).